Capital taxation
Subtitle: quantitative explorations of the Inverse Euler equation
By: [by] Emmanuel Farhi [and] Ivan Werning
Contributors: Werning, Ivǹ; Massachusetts Institute of Technology. Dept. of Economics
Edition: Rev.
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 06-15 [2009 revision]; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 06-15, 2009.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Number of pages: 50
Other titles: Quantitative explorations of the Inverse Euler equation
Description: This paper studies the efficiency gains from distorting savings in dynamic Mirrleesian private-information economies. We develop a method that pertubs the consumption process optimally, while preserving incentive compatibility. The Inverse Euler equation holds at the new optimized allocation. Starting from an equilibrium where agents can save freely allows us to compute the efficiency gains from savings disortions. We investigate how these gains depend on a limited set of features of the economy. We find an important role for general equilibrium effects. In particular, efficiency gains are greatly reduced when, rather than assuming a fixed interest rate, decreasing returns to capital are incorporated with a neoclassical technology. We compute the efficiency gains for the incomplete market model in Aiyagari [1994] and find them to be relatively modest for the baseline calibration. For higher levels of uncertainty, the efficiency gains can be sizable, but we find that most of the improvements can then attributed to the relaxation of borrowing constraints, rather than the introduction of savings distortions. Keywords: Capital taxation, inverse Euler equation, constrained efficient, Chamley-Judds. JEL Classifications: E6, H2.
Notes: "November 30, 2005. Revised version: April 10, 2009."

Includes bibliographical references (p. 48-50).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.